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Providing exposure to real assets can help advisors build resilient portfolios for their investor clients. Yet, investors get only partial benefits of this asset class though public market real estate investment trusts (REITs) or exchange-traded funds (ETFs) holding companies with indirect exposure to infrastructure, farmland and timber.
“We often hear from advisors that they want access to private real assets for high-net-worth and mass-affluent clients, but that’s a struggle because of the lack of choice,” says Eric Menzer, senior managing director, Manulife Investment Management.
Even the wealthiest clients are challenged to get diversified exposure. Typically, the minimum investment for private real asset funds begins in the low millions of dollars as they cater primarily to institutional investors.
Even then, a fund might specialize in just one real asset such as private real estate, Mr. Menzer notes. He says it can be prudent to allocate as much as 20 per cent of client portfolios to a diversified sleeve of private real assets. That’s especially true since 2022, when the classic balanced portfolio of public equities and fixed income showed its flaws.
Whatever the allocation, the case for getting clients a diversified sleeve of private real assets is strong given how they can protect against market shocks.
Research shows that in the 20 years ended Dec. 31, 2022, the annualized returns on private real assets – such as farmland (11.7 percent), Canadian real estate (9.3 per cent) and infrastructure (9.2 per cent) – outpaced U.S. equities (8.9 per cent). Private U.S. real estate (8.2 per cent) and private timberland (6.1 per cent) also far surpassed Canadian fixed income (3.7 per cent) and U.S. fixed income (3.1 per cent).
In aggregate, a globally diversified portfolio of real assets provides a hybrid return of growth and income, Mr. Menzer says. “The general rule of thumb for real assets is that half their return is from income.”
Despite the potential upsides of this asset class, advisors are challenged in getting diversified exposure, with only one obstacle being the high minimum investments. Most advisors don’t have the skill set to build a diversified sleeve in client portfolios, Mr. Menzer says.
However, a new breed of actively managed, private multi-real asset funds have emerged in the past few years that cater to accredited investors. Among them is Manulife Real Asset Investment Fund, which offers exposure to globally diversified private real assets.
“It’s a single-ticket solution, which we believe is particularly attractive for many advisors,” says Mr. Menzer, a senior portfolio manager for the fund.
The fund’s management team uses a top-down approach, informed by macroeconomic research from Manulife Investment Management’s capital markets and economic teams. The portfolio managers allocate investor capital into its long-running real asset funds, used widely by institutional clients. In fact, Manulife Investment Management is the world’s largest timberland real asset investor and among the top five-largest agricultural real asset investors.¹
“We also use an open architecture approach, investing in strategies by hand-picked third-party active managers,” he says.
There’s another advantage for advisors and their clients. Typically, private real asset funds involve “J-curve” performance, in which new investor capital can remain dormant for a few years before actually being invested. “The reason is it takes time for fund managers to build deal pipelines,” Mr. Menzer says.
That lag may suit patient institutional investors who are managing pools of assets in perpetuity, he adds. But it doesn’t suit retail clients with shorter timelines; they need their money working from the start.
Manulife Real Asset Investment Fund overcomes the J-curve problem. As of Jan. 31, part of its portfolio, comprising less than 30 per cent of assets under management (AUM), consists of publicly traded real asset exposure through ETFs and fixed income securities. That allows new investor capital to get working immediately. As new private market opportunities emerge, that capital is moved into those investments.
“This all happens behind the scenes,” Mr. Menzer says. “Advisors and clients experience seamless exposure to a diversified portfolio of real assets, made up mostly of private, actively managed opportunities de-correlated from public markets.”
Manulife Investment Management portfolio managers oversee all strategies, including third-party subadvisors who are vetted thoroughly. The high-level framework for assessing is what he calls the “three Ps”: people (the managers), process (their strategies) and performance (the track records).
Once invested, portfolio managers like Mr. Menzer meet with third-party management teams at least quarterly. That includes visiting assets for first-hand understanding.
“We’re not just looking at the financial statements and research, we’re getting out there to see timberland and agricultural operations,” he says.
Manulife Real Asset Investment Fund has been available to accredited investors since 2022, but has been open to institutional investors since 2015. The fund’s significant growth in AUM speaks to the importance of having experience in this category, Mr. Menzer says.
“Our job is constantly seeking to allocate investor capital where it’s going to be treated the best on a risk-adjusted basis,” he says. “We do all the heavy lifting so advisors can focus on helping clients meet their objectives like retiring well.”
1 IPE research, as of Jan. 29. Ranking is based on total natural capital assets under management (AUM), which include forestry/timberland and agriculture/farmland AUM. Firms were asked to provide AUM, and the as of dates vary from Dec. 31, 2022, to Dec. 31, 2023.
Important disclosure
Investments in the strategies described herein (including infrastructure, real estate, private equity, and credit) include several risks and limitations, including but not limited to the risk of loss. Each of these investment strategies involves significant risks, any one of which could cause investors to lose all or part of the value of their investment. The following is a short summary of some but not all of the potential risks.
An investment in infrastructure and power assets is subject to certain risks associated with the ownership of infrastructure and power assets in general, including the burdens of ownership of infrastructure, local, national and international economic conditions, the supply and demand for services from, and access to, infrastructure and power assets, the financial condition of users and suppliers of infrastructure and power assets, changes in interest rates and the availability of funds which may render the purchase, sale or refinancing of infrastructure and power assets difficult or impracticable, changes in environmental laws and regulations, and planning laws and other governmental rules, environmental claims arising in respect of assets acquired with undisclosed or unknown environmental problems or as to which inadequate reserves have been established, changes in energy prices, changes in fiscal and monetary policies, negative developments in the economy that depress travel, uninsured casualties, acts of force majeure, terrorist events, under-insured or uninsurable losses, and other factors which are beyond the reasonable control of the investor or its investment manager.
Investors in private equity funds generally do not have an opportunity to evaluate for themselves the relevant economic, financial, and other information regarding the investments to be made by a fund sponsor and, accordingly, will be dependent upon the judgment and ability of the sponsor to source, evaluate, monitor, and exit investments. An investor in fund-of-funds will pay, in effect, two sets of management fees and carried interest fee: one directly at the fund level and one indirectly through the funds at the underlying fund level. These fees reduce the actual returns to investors both in the underlying fund and in the fund-of-funds.
Equity securities purchased in connection with the private equity co-investment program are typically subordinated to large amounts of senior and junior credit securities debt and are typically unsecured. This means that distributions to equity holders are available only after satisfaction of claims of senior and junior credit creditors and any senior classes of equity. Therefore, if a portfolio company does not generate adequate cash flow to service its debt Investments in equity securities of companies with substantial amounts of indebtedness involve a high degree of risk.
General investment risks related to the ownership of real property include, among others, declines in the value of real estate, negative changes in the climate for real estate, risks related to general and local economic conditions, decreases in property revenues (including financial failure of tenants), increases in prevailing interest rates, property taxes and operating expenses, decreases in property revenue, changes in zoning laws and costs resulting from the cleanup of environmental problems. The value of real estate is typically dependent upon the ability or the potential for the applicable property to produce cash flow. The basic risks of lending and direct ownership of commercial real estate mortgages include but are not limited to borrower default on the loan and declines in the value of the real estate collateral. Defaults can be complicated by borrower bankruptcy and other litigation including the costs and expenses associated with foreclosure which can decrease an investor’s return.
Investments in debt instruments, whether senior or subordinated debt, public or private, secured or unsecured, or investment-grade or below investment-grade, include liquidity risk, interest rate/market value risk, credit risk/market risk, prepayment risk, ratings risk, exchange rate risk, and risk of bankruptcy. Investing in leveraged senior loans also involves additional risk that the collateral securing a loan decreases in value, is difficult to sell in a timely manner, is difficult to appraise and fluctuations in value based upon the success of the business and market conditions, including as a result of the inability of the portfolio company to raise additional capital. Investments in subordinated debt/loans involve additional risks and can be highly speculative, involving a high degree of risk of credit loss.
Investing in timberland, farmland and Plus assets involves the risk of loss. Discretionary investment management accounts investing in farmland, timberland and Plus assets generally are subject to the following risks: fluctuating commodity prices, competition in the commodity markets, bad weather and natural disasters, loss of water rights, adverse government regulation, changes in SRI standards, changes in environmental protection regulation, and liability associated with environmental clean-up and remediation.
Investments in non-U.S. farmland, timberland and Plus assets, especially those investments located in emerging market countries, generally are subject to the following additional risks: political and economic factors causing disruptions in local markets, restrictions on investments, currency controls, and repatriation of investment proceeds, currency fluctuations, lack of developed property rights, and adverse changes in tax laws to disfavor foreign investment. Plus assets also are subject to the following additional risks: limited experience investing in Plus assets, especially as a stand-alone or principal investment strategy, unexpected complications in implementing vertical integration of growing and processing operations, labor issues, regulations, food safety concerns, failure to maintain operating permits, competition, manufacturing disruptions, complications associated with the joint ownership.
Investing involves risks, including the potential loss of principal. Financial markets are volatile and can fluctuate significantly in response to company, industry, political, regulatory, market, or economic developments. These risks are magnified for investments made in emerging markets. Currency risk is the risk that fluctuations in exchange rates may adversely affect the value of a portfolio’s investments. The information provided does not take into account the suitability, investment objectives, financial situation, or particular needs of any specific person. You should consider the suitability of any type of investment for your circumstances and, if necessary, seek professional advice.
This material, intended for the exclusive use by the recipients who are allowable to receive this document under the applicable laws and regulations of the relevant jurisdictions, was produced by, and the opinions expressed are those of, Manulife Investment Management as of the date of this publication, and are subject to change based on market and other conditions. The information and/or analysis contained in this material have been compiled or arrived at from sources believed to be reliable, but Manulife Investment Management does not make any representation as to their accuracy, correctness, usefulness, or completeness and does not accept liability for any loss arising from the use of the information and/or analysis contained. The information in this material may contain projections or other forward-looking statements regarding future events, targets, management discipline, or other expectations, and is only as current as of the date indicated.
The information in this document, including statements concerning financial market trends, are based on current market conditions, which will fluctuate and may be superseded by subsequent market events or for other reasons. Manulife Investment Management disclaims any responsibility to update such information.
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